Hedge funds react to short selling bans in eurozone

Hedge funds have raised their bets against financial stocks in the UK, United States and Germany as a short selling ban in four euro zone countries prompted them to focus elsewhere for ways to profit from the banking sector's difficulties.

Figures from Data Explorers show stock out on loan, a strong indicator of shorting interest, for financial stocks in the UK, US and Germany has risen strongly since August 12, when Spain, Italy, Belgium and France imposed shorting bans on certain financial stocks.

While prime brokers say funds' overall short bets are low after a choppy summer for European stocks, the data nevertheless backs up anecdotal evidence that some managers have been looking for other ways to bet against Europe's banking sector.

Short selling, a common way for hedge funds to profit from falling share prices, involves borrowing stocks to sell and then aiming to buy them back more cheaply later.

Stock out on loan in FTSE 350 Financials index has risen 16% to 3.02% since the ban came in, whereas short interest on the broader FTSE 350 has fallen.

The rise in short interest in UK banks also comes ahead of the Independent Commission on Banking's final report on September 12, when it is expected to back its interim proposals that UK banks should ring-fence their retail operations from riskier investment banking operations to protect taxpayers from future crises.

In Germany, stock out on loan on the DAX Financials index is up 31% to 1.24 %, while for the wider DAX All Shares index it has barely changed.

In the United States, stock out on loan on the S&P 500 Financials index has jumped 44% to 2.75%, while for the broader S&P 500 index it is up 16%.

In contrast, stock out on loan for financial stocks subject to the ban has increased only marginally in Belgium and France since August 12, while in Spain and Italy it has fallen.
Last week Spain, Italy and France extended their short selling bans, while Belgium, whose curbs have no end date, kept its ban in place.

Since August 12, the STOXX Europe 600 banking index .SX7P has fallen 19% while the broader European market is down 12%.

However, overall short selling by hedge funds is still not high, and has crept downwar